IBEX Limited (IBEX) Q2 2022 Earnings Report, Transcript and Summary

Welcome to the IBEX Second Quarter Full Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I will now turn the conference over to your host, Ms. Brinlea Johnson with the Blueshirt Group.

Good afternoon and thank you for joining us today. Before we begin, I want to remind you that the matters discussed today on today's call may include forward-looking statements related to our operating performance, financial goals and business outlook, which are based on management's current beliefs and assumptions. Please note that these forward-looking statements reflect our opinions as of the date of this call and we undertake no obligation to revise this information, as a result of new developments, which may occur. Forward-looking statements are subject to various risks, uncertainties and other factors that could cause our actual results to differ materially from those expected and described today. For a more detailed description of our risk factors, please review our final perspective filed with the US Securities and Exchange Commission on October 14, 2021. With that, I'll turn it over to Bob Dechant, CEO.

Thank you, Brinlea. Good afternoon, everyone and thank you all for joining us today as we discuss our second quarter fiscal year 2022 results. Karl and I are excited to be presenting to you today. We are now 18 months since our IPO of August 2020. We have made significant progress on our strategic initiatives over this time despite the challenges from the pandemic. We have built a business that has evolved and is accelerating meaningfully in terms of growth and new client wins. We have improved our client diversification, which was a risk at the time of the IPO and is now in an advantage. At the same time, our growth continues to dominate in our high margin regions. Importantly, we continue to transform our business into a digital-first business with so many great client brands referred to as BPO 2.0 over the last two years. We believe FY '22, will be a watershed year for IBEX with many key milestones within sight and our forward trajectory is even more exciting. As we shared with you last quarter, we were confident that our business was positioned to accelerate growth into Q2 and beyond and this is exactly what we delivered in the second quarter with record results. Revenues increased approximately 13% year over year representing a combined two-year growth of 23% and resulting in our highest revenue quarter ever of $132.2 million. LTM for revenue and EBITDA are $458 million and $61.8 million respectively resulting in a 7.1% organic growth and 13.5% EBITDA margin. The confidence we have in our business is allowing us to raise revenue guidance. However, the underlying narrative is even more compelling. In my six years at the helm, the growth engine we have built here is the strongest ever. Our revenue generated from new clients one since FY '16, who are hyper-growth companies, primarily adopting our omnichannel capabilities integrated with Wave X Technologies and analytics grew by an impressive 57% during the quarter up from 37% a year ago and 34% last quarter. This group of customers now make up 70% of our total company revenues. Our legacy three clients, which at the time of our IPO were 44% of revenue have stabilized as revenues for these clients were approximately flat sequentially. Importantly, these clients now represent less than 20% of revenue, and we expect to continue to reduce that percentage going forward as the rest of our business accelerates. The new logo engine continues to perform at a blistering rate. We closed three new logos for the quarter for a total of 12 year to date across key verticals. For added perspective. In FY '20, we sold $12.5 million of in-year revenue from new clients. Last year, we won 23 new clients, which build $30 million of in-year revenue. This year, we expect to generate $50 million of in-year revenue from our new clients with more important opportunities slated in the back half of the year. As a reminder, our growth model is designed to deploy a land and expand approach with our clients and this is what we are achieving. We begin our client partnerships by delivering exceptional CX results and then showcase the additional insights and partnership solutions that Wave X and our business intelligence tools can offer. This subsequently allows us to expand into new services with these clients and increase our wallet share with them over time. On average, the revenues in year two of our client relationships are between 2.5 X to 3.5 X year one revenues with continued strong growth into year three. Therefore in FY '23, we expect to drive over $100 million in revenue from this new cohort of clients with continued growth into FY '24. While I'm very excited about our performance and outlook, I am particularly proud of the robust and rapid diversification of our client base. We've added exceptional high growth brands and today our top five clients represent just 41% of our business versus approximately 58% at the time of our IPO. And we now have nearly 50 clients with more than $1 million in annual revenue. Our largest client now represents just 12% of revenue. This level of diversification is now a true competitive advantage for IBEX and is exceptional for a BPO provider of any size. This incredible diversification stems into the strategic industry verticals we're winning with in the market. Our FinTech and HealthTech verticals are now approximately 20% of our business combined. We started our initiative of targeting these markets in FY '20 and we now project these to be more than $100 million inorganic revenue this fiscal year. This will represent an increase of greater than 65% for the year and furthering the success of the quarter, we continue to have 100% client retention, a testimony to our value proposition and our bill to deliver for our clients. The structural design of our business that includes powerful growth and accelerated demand with our digital first clients, high win rates of our sales pipeline, well diversified client mix, limited telco exposure and industry-leading client retention gives us great visibility and confidence in our business. As such, we expect growth to continue to accelerate in the second half of the year beyond our Q2 growth rate of 13%. Our geographical make up is equally impressive. We added approximately 2,500 new seats in the quarter with the majority of those in nearshore and the Philippines markets. Since our IPO, we have added over 6,500 seats in these markets. Today. 88% of our seats are in our high margin regions, which have grown at a 22% CAGR since FY '16. The majority of our footprint today is operating in a socially distanced model, complemented with work at home. As we move forward to a world where we resume to pre-COVID operating model, we are in a great position to significantly grow with limited CapEx investments. This will have a very positive impact on our margins and free cash flow. While our revenue growth was strong and margins improved sequentially from 0.6%, adjusted EBITDA was flat on a year over year comparison. This was driven primarily by costs associated with ramping our new business, which includes agent training and investments in overhead. We expect our overall margins to improve significantly in the second half of the year as our ramp costs stabilize. During the quarter, we also had a broadening of our ownership structure. TRGI, our majority shareholder has approved the transfer of a portion of its IBEX's shares to some of it shareholders. This has reduced TRGI's direct stake in IBEX from 62% to 35% and will allow us to meaningfully broaden our investor base over time. We welcome the transition of the holdings in IBEX of these new shareholders from an indirect state to become direct IBEX shareholders. Our net cash position on our balance sheet continues to offer us tremendous amount of flexibility when opportunities present themselves regarding capital allocation. This is demonstrated by our recent share repurchase announcement that we've made and the recent insider buying across members of our executive leadership team and the board, including myself. Regarding our share repurchase, our board has authorized us to repurchase up to $20 million of our common stock. We just recently began purchasing share and while we of course look forward to a rerating of our stock price, the internal rate of return today for our shareholders is very attractive. One of the proudest moments this quarter came amidst a terrible tragedy, our team endured as typhoon ode ripped through the Island of Baha in the Philippines causing significant damage to our employees and their family's homes and to the community at large. Our team responded immediately and with such incredible care. Very quickly, IBEX employees donated over $100,000, which the company matched for a total of over $200,000 to provide for essential needs like food and water and for the rebuilding of the homes of our team members. We are also using a portion of the funds for community outreach programs to go along with the many hours our employees have volunteered to help the community get back on its feet. Our business and our employees demonstrated in an incredible resilience as they remained operational throughout the storm and they continue to remain operational and perform at very high levels. While we wish we would never know of tragedies like this again, that it is amazing to watch the IBEX culture at work. As we continue to provide compelling solutions for our clients, we also develop meaningful and impactful initiatives for our employees and the communities we operate. In particular, our diversity, equity and inclusion programs that are part of our corporate ESG strategy have helped our employees develop critical skills necessary for elevating into new roles with added responsibility and decision making. Since our IPO, we have launched the Women in IBEX, where we have created multiple programs to support and advance women in the workplace. Keynote female speakers from our top clients have provided time and resources to this program, as well as participating in our global mentorship initiative, where leaders are matched with college graduates from underserved countries all over the world. Our commitment to do the development of our workforce is second to none and we are energized by the advancements. We are enabling in the lives of our employees around the globe. We are also proud of the diversity we have built at IBEX from our board of directors, through our leadership and through our agent population. In closing, we are confident in the business we have built and its outlook. We are a key partner for many great brands in the industry. We continue to add many new hyper growth clients to our base in our strategic verticals. The growth we have is predominantly in our high margin geographies and services. We expect our revenue growth and EBITDA margins to accelerate. As such, we are increasing our guidance for revenue growth to 10% to 12% from 7% to 9% previously while maintaining our previous EBITDA guidance of $69 million to $71 million. I will now turn the call over to Karl. Karl?

Thank you, Bob and good afternoon, everyone. Thank you for joining the call today. We are excited about our progress and the results we delivered in Q2. Our business is accelerating as a result of our success with clients in the digital first marketplace, as well as in our strategic FinTech and HealthTech verticals. Our performance highlights the level of differentiation that we have with our services, including our Wave X technologies. The momentum we are building will have a positive effect on our long term growth and margin trajectory. In my discussions of financial results, references to revenue and net income are on an IFRS basis while the adjusted net income, adjusted EBITDA and adjusted earnings per share, are on a non-GAAP basis. Reconciliations of our IFRS to non-GAAP measures are included in the tables attached to our earnings press release. Second quarter revenue increased 12.8% to $132.2 million compared to $117.2 million in the prior year quarter and 21.7% sequentially. We continue to experience high growth in our clients one since fiscal year '16. This cohort grew by 57% over the prior year quarter, and now represents 70% of our total revenue. The growth in revenue this quarter was offset by significant decreases related to our legacy top three clients. While these clients are down 38% from the prior year quarter, they are flat sequentially and now represent less than 20% or approximately $26 million in quarterly revenue. We expect this group's revenue base to remain around this level going forward, and that it will decrease as a percent of revenue over time. Net income in the second quarter was $8.5 million compared to $2.5 million in the same period last year. The increase in net income was primarily driven by $6.3 million decrease in the fair value measurement related to the warrant liability offset by an increase of $1.7 million in depreciation as we continue to invest in the growth of the business. We expect our annual effective tax rate to be in the high single digits on a normalized basis, excluding the effect of the warrant fair value adjustment. This excludes a one-time deferred tax benefit of our approximately $4 million, which is expected to be realized in the second half of our fiscal year, reflecting the benefits of our ongoing tax planning efforts as discussed last quarter. On a non-GAAP basis, adjusted net income was $5.2 million versus $6.1 million in the prior year quarter and adjusted fully diluted earnings per share was $0.27 versus $0.33 in the prior year quarter. The decrease in adjusted net income and adjusted fully diluted earnings per share was primarily driven by an increase in depreciation as mentioned previously. Adjusted EBITDA for the second quarter of fiscal year 2022 was $17.8 million with 13.5% of revenue compared to $18 million or 15.3% of revenue in the prior year quarter. The adjusted to even a margin decrease compared to the prior year quarter was primarily driven by the cost associated with ramping our business along with continuing investment in overhead to accommodate our growth. Sequential adjusted EBITDA margin increased 290 basis points over the first quarter. Switching to our verticals, our FinTech and HealthTech verticals continue to grow in response to our aggressive investments two years ago, increasing significantly to 19.5% in the second quarter up from 11% in the second quarter of fiscal year '21. Travel and logistics increased to 13.2% of revenue compared to 8.4% in the prior year quarter, driven by new economy clients. Retail and e-commerce now represents 23.7% of revenue compared to 21.7% in the prior year quarter, as we continue to win in a digital first marketplace. Our exposure to the telecommunications vertical decreased to 17.2% of revenue compared to 29.5% a year ago. In summary, we have made great progress on our revenue diversification goals. Total capital expenditures were $11.8 million or 8.9% of revenue in the second quarter of fiscal year '22 versus $6.4 million or 5.4% of revenue last year. We added over 2,500 new seats primarily in our high margin, nearshore and offshore locations during the quarter. Net cash generated from operations was $3.4 million for the quarter compared to $4.3 million in the second quarter of fiscal year '21 impacted by higher working capital usage offset by lower cash taxes. DSOs were 62 days for the second quarter, an increase of 14 days from the same period last year and decreased one day sequentially. The year over year increase was driven by revenue growth, timing of collections, and one of our larger clients reverting to standard payment terms in the fourth quarter of fiscal year 2021. Non-GAAP free cash decreased to negative $8.4 million from negative $2.1 million in the prior year. The decrease in free cash was primarily driven by an increase in capital expenditures of $11.8 million as compared to $6.4 million from last year. Our pay balance sheet remains strong and we ended the quarter with $51.5 million in cash, total borrowings of $37.7 million and lease liabilities of $89.4 million compared to cash of $57.8 million, total borrowings of $28.5 million and lease liabilities of $84 million as of June 2021. With continued focus on our strategic verticals, winning digital first marketplace new clients and technology investments to expand our customized Wave X solutions, we believe we are well positioned for a continued future growth. With that, Bob and I will now take questions. Operator, please open the line.

[Operator instructions] Our first question comes from the line of Tobey Sommer from Truist Securities. Your line is now open.

Thank you. I was wondering if you could give us sort of map out over the next several quarters, how the margins improved and I'm focusing in on two vectors, the growth that you've done in seats, as well as kind of the added expenses associated with remote work at the same time, you're adding to sort of that duplicative nature and how that could you bridge us to the more profitable profile? Thank you.

Sure Tobey and hey, thanks for joining and appreciate the question. So when I think about our business, I think we have done a really, really good job of structurally building this business for double digit growth and continued trajectory on our EBITDA margin but based on when certain client which come in clusters sometimes like it did recently for us, you might get some fluctuations in your margins in quarter. But when I think more longer term on this, I feel like we've built this business that top line growth can be in that let's say upper single digits all the way up into the to mid-teens and I also believe that as we said, even a little while back, our midterm trajectory was north of 15% EBITDA, I think we're structurally pretty close to that and, so I think that trajectory really looked like that out over the next several quarters.

And you indicated that CapEx, you have some visibility into that perhaps diminishing after this -- from this elevated level. How, do you sort of get comfort in that view as being the right one?

Sure. Tobey and our CapEx over the last year driven by social distancing of our centers has been at a higher rate than historically has been. And so, we believe that there is at some point when we resume back to pre-pandemic operating models or close to that, we believe that we have a nice 18 month to two year trajectory of a lot lower CapEx. But then if we step back and think maybe just a little bit longer term, we're a growth company and so, I kind of feel like a that our CapEx will be in the overall to grow this business would be in about all in at about, I don’t know maybe about a 5% range. And that will allow us to grow that but we're also excited about that kind of next 24 months of limited CapEx and really as our centers fill back up again in a nonsocial distance environment and as said in my remarks, I think at that point we'll be generating it will be a very good effect from a free cash flow standpoint for us.

Thanks. If I could squeeze in one more, could we get your perspective on wages and inflation, both from a pricing perspective as you interface with customers, as well as internal costs and elevated rates of turnover as a result potentially and I know you have multiple geographies to draw from, in terms of your answer.

Sure. So very, very pertinent question today -- in today's environment and when you think about our business, we are growing outside the US and certainly in a market like the US, wages are certainly under pressure. How I look at this is our agent wages, which are really, really the important element. They range between 50% to 70% of call it like our total cost to operate ao, depending upon the geo. And so we've engaged around that, we've engaged with clients and have had success with clients, with sharing where the wages are going and consequently getting price adjustments, price increases from them. We are in a lot of our contracts, we've negotiated call it or cost of living adjustments into the contracts. So while we feel like maybe we're not a 100% covered right now, we've done a really good job as a company, kind of covering this ourselves that way, or a lot of it we'll continue to have further discussions with our current clients and like I said, a lot of our new clients we've brought on board have cost adjustments built into it.

Thank you. Our next question comes from the line of Dave Koning from Baird. Your line is now open.

Yeah. Hey guys. Great revenue momentum.

Yeah. Thanks Dave. Yeah, we're really excited about that. And we knew we had with all the new logos that we've been winning and just in the growth inside the base that we have a lot of good things going on here. Thanks.

Yeah, no, it's great to see and I guess, yeah, my first question kind of relates to that. It looked like when we put kind of some of the numbers you gave around the top three, it looked like those were down $5 million, but that means the non-top three were actually up sequentially $28 million. That's a massive amount. Was there anything non-recurring in there or is it all pretty steady kind of going forward? Or how should we think of all that?

Sure. what we're most excited about is, there's look and you know our business that we do have seasonal from, into retail around the holidays. And so there is a little bit of that, but the lion's share of our growth is go forward, sustainable. It's even, when I'll say, growth into, historical would be growth into Q3 and Q4 for us. So we're excited about that trajectory. And one data point I'll just share with you our historically our Q1 to Q2 growth is, kind of in that 7%, 8%, 9%, and us being in the twenties, 20%, 22% for us was really excited and that's all the new stuff that we brought on board that we shared last quarter.

That's that's great to see. And then two, just kind of quick ones, I'll just give them together. The wage inflation, is there any leg impact from the revenue, like the Cola that you can get, like does this year have more wage inflation the next year you get kind of that pick up in revenue that you can charge. And then when do those new shares that are being distributed, when do those hit the market and then I'm good. Thank you.

Okay. Sure. So, there is a little bit of a lag, but we got out in front of this with some of our key clients, our key embedded based clients and so, I guess I would say, from 25 years of being in this industry, I really like how our partnership with our clients have allowed us to get out and in front of this. So, feel very good about that and then obviously with a lot of the new clients that we've brought on board just recently, the cost structures we built are pretty current. And so I just like our position as we go forward, obviously there will be risk, there will be some pressure, but again, our US business is a much smaller percentage and that's where it's immediate now. And we expect probably we'll have some pressures in some of the other markets as we look out, but I think we've done a good job on that. And then Dave, the second part of your question, the new share. So as customary, there was a lockup period as those shares got distributed to the limited partners. That's, I believe about a six, not about, it's a six month lockup. So, I'd look at that to occur later in the later in the calendar year.

Thank you. Our next question comes from the line of Arvind Ramnani from Piper Sandler. Your line is now open.

Hi. Thanks for taking my questions. The first question I had was around kind of the exposure you have to certain industries. I think one company that stands out is Lyft and I'm sure the others, but just with kind of a lot of vaccinations in, and as we look into '22 kind of this kind of the kind of COVID, some of the COVID impact behind us, do you expect to see an uptake in transaction based volume from a certain segment of your customers? And is it material enough to kind of for us to think about it, or is it, or you feel it's various counterbalance where it doesn't really matter?

Or great, great question. I think your last part of that was probably most appropriate. I think there are some counter -- counterbalance as well. So and there are some sub-segments that we think the transactions will start moving up, but, I think those get offset and we'll, kind of get offset with some counterbalances and I'll just share with you, in the retail and eCommerce world with the supply chain issues and things like that. The number of -- the amount of, overall transactions, I think there, are a little bit off from where they were a year ago. And I think that's directly, to the supply chain. So when I think of those issues, those are probably out there for a little while and probably a little while past let's say if we get to a post COVID world. And so, I think those are counterbalances to some of the upsides.

Okay. Yeah. That, that -- that's helpful. And just in terms of the kind -- of the kind of the share repurchases, that you have as well as kind of the -- the yeah, actually, maybe just start with the, the share repurchases is like, I mean, certainly there's a word of confidence in going and buying -- buying stock at these -- at these at these levels, but do you, you kind of worry about it? Kind of liquidity as well, just given kind of the market cap of the stock, like, kind of 20 -- $20 million is, almost like 10% of fluid, right. So that's a big, big sort of repurchase said, just how do you think of think of, kind of the balance and float?

Great question. So first and foremost, the compelling IRR which, where we're trading is can be, it's too hard to pass up, just to be very clear on that, because we have so much confidence in our business. But they're back to, like we talked just prior counterbalances, right? So counterbalance is the, what I believe is what TRG has done of the distribution. And so, if you look out over -- over, beyond six months, I think our float will be in a much better environment as some of that becomes available. And so, we think it's such a great investment from our standpoint. We couldn't not do that, from a, wise use of our -- wise use of our capital. And again, we're, we're comparing that versus for us right now, investing into further buildouts, centers that we've been doing and doing that aggressively and had very short ROIs, the share buyback was even more compelling.

Yeah. Yeah. It makes sense. And just point of clarification no December 8th you announced this $20 million, is this the same 20 or is it, is it like 20 plus 20? I just, just…

Want to clarify that. No, yeah, yeah. Thank you for that. The clarifying that is the same, the same, the same 20 by the time we, this got implemented at all, it just kicked off in literally in in this quarter.

Okay, perfect. Yeah. That's all the questions had. Thank you.

Yeah. Thanks Ram.

Thank you. Our next question comes from the line of Matthew Roswell from RBC Capital Markets. Your line is now open.

Yes. Good. Couple of questions around the revenue growth cadence. How should we think about differences between a third and fourth quarter with the new contracts ramping up and as part of that, when does the sort of -- the legacy business stop being headwind to year on year revenue growth?

Great question and, and appreciate that. And so look, as we've guided and if, we obviously, have a, what I think is really good visibility to our business, and if you do the mathematics of everything, that I like the, this Q3, Q4 we'll follow a different curve. What we've had in the past, which is, a, sequential, sequential downturn. We have a lot of confidence, you know in, in that Matthew. And so and I apologize if you could part -- part B of your question, if you could just touch on that again, I apologize.

When, when -- when did you see clients stop being a headwind you're on your revenue growth?

Sure. So, yeah, yeah. So, so we, we, we look at that business as basically sequentially flat right now. And so, but it is, did have several, several quarters of sequential downturns. So, when I think of full comparisons by Q1 of this FY'23, that'll be, that'll be flat, but literally with it being 20% of our less than 20% of our business and now kind of in this flat sequential, we don't see that that really moving our -- really factoring into many headwinds into, into our business. So you will see the true growth engine of our business as we move into Q3, Q4 and then certainly as we, as we hit the ground running and FY’23.

Okay. And final accounting question, if I can sneak one in, the revaluation on the Amazon warrant, that's solely tied to your stock as opposed to any change in the relationship with Amazon. Correct?

Correct.

Correct. And Carl, why don't, if you want, maybe you could add a little color on that.

Sure, sure. It, it is it's related to you do a mark to market on the on the liability, at the end of each quarter which is impacted by the stock price. So the stock price goes up, which would've been consistent with Q2 of last year. You saw a positive impact and if it goes down like Q2 of this year, fiscal year '22 it was a negative to the income statement, but it's, it's solely on the mark, the market that you're doing on the liability, nothing with the overall relation with Amazon. Okay. Thank you.

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to management for closing remarks,

Thanks. So look, I thank you all for attending. We are as you can tell, very excited about the trajectory of our business. What we built here is we feel very proud about, and we look forward to seeing you all next quarter, as we share -- share the exciting journey here. So thank you all and have a good night.

This concludes today's conference call. Thank you for participating you now disconnect.